Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Satellite Radio Makes the Locals Sweat

Are Sirius and XM out to replace local radio? In some cases, you bet they are.

Here's another in a long line of things that the government ought to keep its nose out of, but probably won't:

The National Association of Broadcasters has asked the Federal Communications Commission to bar the satellite radio companies -- a duopoly comprising XM Satellite Radio(NASDAQ:XMSR) and Sirius Satellite Radio(NASDAQ:SIRI) -- from providing customized local traffic and weather reports. The gist of the association's petition was that these two companies are trying to replace local radio stations.

Well, of course, that's what they're trying to do, in markets where broadcasting makes financial sense for them. The question is why in the world the FCC would feel the need to stop them from doing so. This seems like yet another area where government intervention is wholly unwarranted, that the government ought not to be picking winners in the radio market.

Serving the nation, not just DetroitRadio broadcasters, including Clear Channel(NYSE:CCU), Entercom(NYSE:ETM), Citadel Broadcasting(NYSE:CDL), Cumulus Media(NASDAQ:CMLS), and Cox Radio(NYSE:CXR), were understandably nervous back in 1995 when the FCC was considering licensing two satellite digital audio radio service (SDARS) providers. Satellite radio had the potential to create a different class of competition in a business that had already gone through tremendous upheaval and cutthroat competition. The competitors for the SDARS licenses noted that they would not be able to compete on the same level for local programming, and as such they would not be direct competition. And further, both Sirius and XM claimed that they would be focusing on filling in niche programming on their stations, including programs for senior citizens; ethnic programming -- for example, a Vietnamese language channel; and so on. It was enough to convince the FCC, as the commission approved two slices of spectrum for SDARS.

But my reading of what the broadcasters call assurances that Sirius and XM would not offer local programming back in 1995 is a little different. Essentially, the broadcasters claim that the two offering local radio services, even on nationally transmitted channels, constitutes a violation of the FCC licenses that XM and Sirius received. Obviously, both XM and Sirius disagree. What does seem clearer is that the FCC prohibits the two companies from placing terrestrial facilities that would allow them to narrowcast customized services to different parts of the country. What Sirius broadcasts in Detroit must be available in its entirety in Omaha, and vice versa.

But these assurances look more like statements of reality as it existed in 1995 -- that the SDARS business model did not contemplate local services. The FCC agreed, stating that it didn't think that it would be technologically feasible for the SDARS companies to provide locally tailored programming. It's not that they wouldn't do it, it's that they couldn't under the technological restraints of the time.

Did anyone, from the FCC to the satellite radio applicants to the terrestrial broadcasters, actually think that the technology for satellite radio was completely mature, that no new improvements were possible? One of the main reasons that the SDARS companies downplayed the idea of local broadcasting was that at the time, technology created the ability to provide about 30 channels of programming. Today, the number of channels you can tune in with XM and Sirius exceeds 100 as compression algorithms have improved. Why would a company blow 3% of its nationwide bandwidth just to provide traffic reports and local news in Los Angeles? It wouldn't. But one out of 150 or more? No problem. The technology didn't exist in 1995, so of course the business didn't contemplate it. In the same way, Alexander Graham Bell didn't invent the telephone with the idea that each of us could receive calls from telemarketers. The opportunity didn't exist. Now it does, and this fact doesn't mean that he was somehow disingenuous when he invented the darn thing.

I've had some experience with both Sirius' and XM's programming. It is absolutely true that the whole notions of "serving underserved markets" and "service complimentary to local broadcasting" have fallen by the wayside. Both companies' station lists are heavily weighted toward popular music, political talk and news, and sports -- offerings that are directly competing with the majority of content on free radio. So even though the companies sold themselves and their services to the FCC in 1995 in part by stating, "Satellite providers have powerful incentives to offer distinct, innovative programming that is not available to radio consumers," we need to understand that by and large this is not at all what XM and Sirius provide now.

Still, I find it hard to believe that in 1995 there existed such confusion as to the nature of SDARS. Satellite radio isn't a "service." It's a platform, one that costs investors billions to deploy. Small wonder then that once XM and Sirius launched, they'd want to go the route to maximize the returns on their investments. Sirius has already had to dilute its investors in spectacular fashion to keep its noteholders at bay. Is it any wonder that its programming would flow to the areas where the most money could be made? A look at the revenue stream of just one of the terrestrial broadcasters, Entercom, will tell you exactly what this is all about: 78% of its revenues come from local advertising.

The public interestThis is important, as the FCC has all sorts of requirements for public service for local broadcasters from which the SDARS providers are exempt. Further, the FCC long ago determined that vibrant local radio was in the public interest. So when the broadcasters say that satellite radio local broadcasts can exist only to the "detriment of the dissemination of free and over-the-air local services to local communities," what they're hoping to sell to the FCC is the concept that local radio's ability to communicate necessary, non-commercial information is at risk. The solution here is simple -- require the satellite broadcasters to offer the same amount of time for public service announcements as the terrestrial ones. The other solution offers more of a problem due to spectrum limitations, but it's something that the government should seek to do -- allow additional competition in SDARS.

But the thought that nationwide broadcasting of local services is some imminent threat to small community radio throughout the land is absurd. XM and Sirius are focusing on the Boston, New York and San Francisco markets, not the South Boston, New Bern and San Luis Obispo ones. They can't, because they don't -- and won't -- have enough channels to offer local programming in smaller markets. And if it were about "diversity," I'd be able to find a good blues station here in the nation's capital, a big radio market, instead of nine different stations offering the same stupid BritneyAguileraSimpson playlist.

This isn't about the public interest: It's about the terrestrial and satellite radio commercial ones. The big markets are where the big advertising dollars are -- and they're under attack by a new delivery system. That's all it is, and once again, where the government picks favorites it does us all a disservice. What we have in SDARS is a new delivery platform, and it's making the installed base nervous. There are some flaws in the specifics, but the last time I checked, that's just capitalism.

Come see what dividend-paying company Mathew Emmert digs up next. If the art of pitching is throwing where the bat ain't, the art of investing is to find stocks where others aren't looking. Take a free trial of Income Investor today.

Bill Mann has no beneficial interest in any companies mentioned in this article. Please consult his profile for a complete list of his holdings. The Motley Fool is investors writing for investors.